Crocs has entered into a definitive agreement to acquire Hey Dude, spelled also as Heydude, a privately-owned, high-growth casual footwear brand, for $2.5 billion. Crocs estimates that the acquisition will turn it into the second-largest group of branded casual footwear, with forecast revenues approaching $4 billion in 2022, to which Heydude will contribute an estimated $700-750 million. The ranking would continue to be topped by Skechers, with Deckers hot on the heels of the enlarged Crocs.
Both Moody’s and Standard & Poor’s placed Crocs’ credit ratings under review, subject to the receipt of additional financial information, while acknowledging the benefits of the transaction. ”“Heydude is a fast-growing, mid-price casual footwear brand with limited brand recognition. Similar to Crocs, Heydude has benefited from the casualization of apparel trends accelerated by the pandemic. Specifically, it increased its revenue and EBITDA exponentially in 2020 and more than doubled both figures this year,” said S&P.
“With the acquisition of Heydude, we are thrilled to add another high-growth, highly profitable brand to our portfolio,” said Andrew Rees, chief executive officer of Crocs. The group aims to build Heydude, which was co-founded in 2008 by Alessandro Rosano, its current CEO, into a brand generating more than $1 billion in revenues by 2024. Heydude is expected to post a top line of about $570 million in 2021, shipping more than 10 million pairs of shoes.
The purchase of Heydude diversifies Crocs’ product line, currently dominated by clogs, which represent 71 percent of its sales. By adding Heydude, the group’s estimated pro forma revenues for 2021 stem at 57 percent from clogs, 20 percent from casual footwear, 13 percent from sandals, 5 percent from Jibbitz charms and the remaining 5 percent from other products.
The addition of Heydude enables Crocs to address an estimated market of over $160 billion, or four times its current market, with casual footwear totalling $125 billion, sandals $30 billion and clogs $8 billion. The acquistion will also boost Crocs’ digital penetration. E-commerce represents 43 percent of Heydude’s sales against 37 percent for Crocs. Digital sales for the combined group would be 38 percent based on estimated pro-forma data for 2021.
Despite having been created in the Italian city of Florence, Heydude is heavily skewed toward the U.S. market, where it achieves about 95 percent of its revenues. It has its headquarters in Los Angeles. Crocs has a greater international presence, with non U.S. sales representing 32 percent of the total, and the group expects to use its global footprint to expand Heydude. It also intends to leverage its marketing expertise, noting that Crocs has a 92 percent brand awareness compared with about 20 percent for Heydude.
According to Crocs, Heydude is predicted to be immediatedly accretive, posting annual revenue growth of more than 20 percent through to 2024 with an adjusted operating margin of about 26 percent. This compares with a forecast annual growth rate of over 17 percent to 2026 for Crocs, with a similar adjusted operating margin.
The acquisition will be funded by $2.05 billion in cash and $450 million in Crocs shares issued to Rosano. The cash consideration will be funded through a $2.0 billion term loan B facility and the remaining $50 million will be borrowed under Crocs’ existing senior revolving credit facility.
The transaction values Heydude at less than 15 times Ebitda relative to enterprise value. The deal is expected to close in the first quarter of 2022, resulting in a net debt about three times estimated pro-forma Ebitda for 2021. Committing to use excess free cash flow to deleverage, Crocs noted that it will not engage in share buybacks next year and until its gross leverage is below two times Ebitda. S&P noted that Crocs has ”undertaken several large debt-funded share repurchases, since we assigned our initial rating in early 2021, totaling approximately $1 billion, which eliminated a significant amount of its leverage cushion to take on a large debt-funded acquisition at this rating level while maintaining leverage of 2x.”
Upon completion of the transaction, Heydude will operate as a standalone division. Rosano will continue as a ”strategic” advisor and creative director. Rick Blackshaw has been hired to join Heydude as executive vice president and brand president. He brings over 25 years of experience in the footwear industry. he most recently served as the CEO at CCM Hockey, but he previously held positions as president of Sperry, president of Keds and vice president and general manager of the Chuck Taylor division of Converse. Blackshaw will be a member of Crocs’ executive leadership team, reporting report to Rees.
